Earnings Call: Q4 2015

Mar 2, 2016

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Teladoc 4Q 'fifteen Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I will now turn the call over to Adam Vandervoort. You may begin your conference. Thank you, and good afternoon. I'm Adam Vandervoort, Teladoc's Chief Legal Officer. Teladoc intends to avail itself of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain statements made during this call will be forward looking statements within the meaning of that law. These forward looking statements are subject to risks, uncertainties and other factors that could cause Teladoc's actual results to differ materially from those expressed or implied by the forward looking statements. For additional information on the risks facing Teladoc, please refer to our filings with the SEC. I'll now turn the call over to Jason Gorevic, Chief Executive Officer and President of Teladoc. Jason? Thanks, Adam. Welcome, everyone, on the call, and thank you for joining us this afternoon to review our strong Q4 and full year 2015 results. I'd like to begin with a couple of financial highlights. We ended 2015 with $77,400,000 in revenues. That's a 78% increase over 20 fourteen's revenue of 43,500,000 We completed approximately 576,000 telehealth visits in 2015. That's a 93% increase over our 299,000 telehealth visits in 2014. We ended the year with a 51% increase in our paid membership base. Our membership grew to 12,200,000 members compared to 8,100,000 members at the end of 2014. Importantly, organic growth contributed over 90% of the company's 2015 revenue and over 97% of the company's membership increase. These results continue to demonstrate excellent momentum in our business. For the remainder of our discussion, I want to cover 3 topics. First, I want to provide some color to help quantify Teladoc's impact on the healthcare system and how much money we've saved our clients in 2015. 2nd, I'll discuss our continued utilization improvements. And 3rd, I'll provide commentary on our strong 2015 selling season and new client wins and give a little insight into some mid year growth in 2016. First, I'll cover the savings to clients in the healthcare system. Over the course of 2015, Teladoc saved our clients and more broadly the healthcare system approximately $387,000,000 by providing nearly 576,000 high quality on demand and affordable virtual doctor visits. This directly translates into more than a 5:one return on investment for our clients. Veracity Analytics led by Doctor. Natish Choudhary, a Harvard researcher and physician at Brigham and Women's Hospital has conducted multiple analyses of the savings generated by the Teladoc program. These studies analyze the total cost of an episode of care for members who use Teladoc against similar populations who use the traditional delivery system. Using the most conservative results from these analyses, Doctor. Choudhary found that Teladoc saves nearly $700 per visit, resulting in nearly $400,000,000 in total savings for our clients, and that's after accounting for all of Teladoc's fees. Again, this translates to a 5:one return on investment for our entire book of business. Doctor. Choudhary is in the process of completing a new study on a population of nearly 300,000 Teladoc members and the preliminary results demonstrate even greater savings. We look forward to sharing the results when the study is complete. These impressive results support not only the sustainability of our business model, which we've discussed on previous calls, but they also demonstrate the tremendous value that Teladoc provides to our clients. Next, I'll cover our continued utilization improvement. During the Q4, visits increased faster than membership for the 12th straight quarter, indicating increased utilization across our membership base. Overall, the utilization rate for our full book of business has increased by a 40% compound annual growth rate over the last 3 years. This is impressive especially when you consider that over 50% of our members have been with Teladoc less than 24 months. Given that the utilization rates for our customers typically increase by 40% to 50% per year for the 1st 3 years, we would expect strong organic growth in our visits from our legacy clients. At the core of these utilization trends are highly successful engagement campaigns. In November alone, we sent communications to over 5,000,000 members and we saw the highest yield of any previous campaign. In fact, over the Christmas and New Year's holidays, we performed more than one telehealth visit every 10 seconds and handled over 400 visit and registration requests per hour during our busiest hours of the day. Additionally, nearly 50% of our visits were completed during nights and weekends and holidays, delivering on our promise of improving consumers' access to quality healthcare. As a result of the strong yield from our fall campaign, we performed 184,000 visits in the 4th quarter in spite of an extremely light flu season. Our utilization trends are a byproduct of our PMPM model, our strong consumer analytics and our proven track record of engaging members. Much has been debated about the merits and viability of the PMPM model, and we believe these results validate 2 things. 1, the PMPM model works. And 2, Teladox engagement campaigns are highly effective. Finally, some commentary on our sales results. 2015 represented our best selling season ever. We added 8 70 new clients for January 1, including 40 Fortune 1,000 companies. Among these large employers, we saw new client wins across multiple industry groups, including such household names as Dell, Sprint, Monsanto, Sherwin Williams, Sony, Panasonic, DuPont, Kohl's and Merck. In addition to our strong showing in the employer space, we continue to have excellent success in the health plan market. On January 1, we launched with Blue Cross Blue Shield of Florida and with Blue Cross Blue Shield of North Carolina. We also launched federal employee populations with 2 of our health plan partners and continued our rollout into new fully insured markets with our health plan clients. As we look forward into 2016, we have also seen very strong sales across all segments from mid year 2016 starts. In the Health Plan segment, we will be launching 4 new health plan clients in the second and third quarters. 3 of these 4 health plans are managed Medicaid plans, a market in which we've had significant success recently, including Metro Plus Health Plan in New York. And the 4th plan is a multi segment health plan, which will be transitioning to Teladoc from a competitor. In the hospital segment, we recently announced a partnership with East Jefferson in Louisiana and we've been selected by Northwestern in Chicago. And also, we have been selected by another large academic medical center who will be transitioning to Teladoc from one of our competitors. In our Employer segment, we are seeing very strong mid year sales, including Fortune 500 Companies such as BP, Vanguard, Progressive Insurance, Toys R Us, UBS and dozens of other companies across the spectrum of industries and sizes. As a result of this increased visibility into sales and visit volume, we feel comfortable tightening the ranges that we communicated in January. Finally, our recently launched behavioral health and dermatology solutions are seeing significant interest and are starting to get traction. The addition of these two offerings not only make us more valuable to our clients by offering a broader set of solutions, but also significantly expands our market opportunity, nearly doubling our total addressable market from $17,000,000,000 to now $29,000,000,000 This is still a hugely underpenetrated market with less than 0.5% penetration, and there remains tremendous opportunity ahead of us in telemedicine. With that, let me now hand the call over to Mark to discuss Teladoc's financial performance. Mark? Thank you, Jason. On today's call, I'd like to discuss our Q4 financial results, and then I'll provide an update on our guidance for 2016. As Jason mentioned, the Q4 was another very successful quarter for Teladoc. In a press release issued on January 11, we raised our earlier expectations for Q4. I'm pleased to report we completed the quarter with $22,600,000 of revenue, representing an increase of 75% compared to the $12,900,000 in revenue we generated in the Q4 of 2014. As a reminder, we derived revenue from 2 sources, subscription access fees and visit fees. Our subscription access fees accounted for $18,000,000 or 79% of total revenue in the quarter. Our 70% increase in subscription access fees was driven by a 51% year over year increase in our membership base, which stood at 12,200,000 members at the end of the 4th quarter compared to 8,100,000 members at the end of Q4 2014. Over 97% of our membership growth and over 90% of our revenue growth was organic in 2015. I want to also provide some perspective on the sequential decrease in our membership from the ending Q3 membership of 12,600,000 members to the 12,200,000 members on December 31. While this number did decline sequentially, the bulk of this can be attributed to a single payer, Health Republic, a co op in New York that was closed by the New York Department of Financial Services during the Q4. It is important to note that timing also played a role in this sequential decline as we started 2016 with over 14,000,000 members. We experienced increases in our average per member per month fees both sequentially and year over year. Our average subscription revenue per member per month was $0.48 in the 4th quarter and compared favorably to $0.43 per member per month in the Q4 of $2,014.44 in the Q3 of 2015. Visit fees of $4,700,000 accounted for the remaining 21% of our 4th quarter revenue. We completed over 184,000 visits in the 4th quarter compared to 110,000 visits in the Q4 of 2014. That's an increase of 67%. Visit growth that exceeds membership growth illustrates our members' increased utilization, as Jason mentioned, but taking it one step further, the increased member utilization allows our clients to realize the meaningful ROI that we are committed to increasing year over year. As I mentioned earlier, for the Q4, our revenue mix was comprised of 79% subscription access fees and 21% visit fees compared to 82% 18% respectively for the comparable quarter of 2014. For the year ended 2015, subscription access fees represented 82% of revenues and visit fees were 18%, compared to 85% and 15% respectively for the year ended 2014. We remain confident that our revenue mix will continue to represent an increasing visit fee percentage in the near future and will trend towards 60% subscription fee revenue and 40% visit fee revenue over the longer term. It took us nearly 10 years to complete our 1 millionth visit. And as of January 1, we are now averaging over 77,000 visits per month. In fact, as of today, we have completed more than 155,000 visits since the beginning of the year. Compared to the same period last year when we completed approximately 101,000 visits, we are experiencing greater than 53% growth. This provides us with a great line of sight into our projected year end visit total. Our gross profit margin for the Q4 was 71%, in line with our expectations and unchanged from Q4 2014. For 2016, we believe that our gross margin profile will average in the mid to low 70% range as we continue to ramp up visit fees as a greater percentage of total revenue. For the quarter, G and A expense totaled $14,100,000 an increase of 89% compared to the Q4 of 2014. Of the $6,600,000 increase, $3,200,000 was related to expanding our Teladoc employee base to support the growth of the company. Over the past year, we increased our headcount by nearly 400 people and ended the year with approximately 600 employees. During the Q4, legal fees, primarily related to the Texas Medical Board and other litigation, accounted for approximately $1,000,000 In the press release we issued earlier today, we have provided reconciliation tables between GAAP and non GAAP measures. Finally, our EBITDA for the quarter was a loss of $12,800,000 compared to a loss of $5,500,000 in the Q4 of 2014. Our EBITDA loss came in slightly better than our projected EBITDA loss of between $13,000,000 $14,000,000 and we anticipate quarter over quarter improvement as we continue our push towards EBITDA breakeven in the second half of next year. In fact, we expect that each consecutive quarter throughout 2016 will produce decreasing EBITDA losses. Our loss per share for the Q4 of 2015 was $0.39 compared to a loss of $3.25 for the same period last year. Our weighted average common shares outstanding were 38,500,000 shares in the Q4 of 2015 compared to just 2,200,000 shares in the Q4 of 2014 when we were a private company. With respect to the balance sheet, we ended the year with $137,300,000 in cash and short term investments and $26,000,000 of debt principally from our bank lines. Due to the proceeds from our IPO, Teladoc is well positioned to achieve profitability without going back to the public markets. To wrap up my prepared remarks this evening, let me provide our outlook for the Q1 as well as the full year 2016 results, which are as follows. For Q1 2016, we expect revenue between $26,000,000 $27,000,000 We expect an adjusted EBITDA loss between $11,000,000 approximately 14,500,000 to 15,000,000 members. Total visits completed to come in between 220,000,230,000 visits and our net loss per share based on 38,600,000 weighted average shares of between $0.36 $0.38 per share. For full year 2016, our revenue expectations range from 118 $1,000,000 to $122,000,000 Our guidance on our adjusted EBITDA loss is between $31,000,000 $33,000,000 Membership is expected to total approximately 16,500,000 to 17,500,000 members and our outlook for total 2016 visits ranges from 880,000 to 900,000 visits. For the full year 2016, we'd expect to record a net loss per share between $1.26 $1.33 based on 39,000,000 shares outstanding. We have very high visibility into 20 sixteen's results and we can already account for more than 90% of our annual revenue. With that, I'll turn the call over to Jason for a few closing remarks. Jason? Thanks, Mark. Let me just close by saying how proud I am of all we've accomplished in 2015. This was a very exciting year for Teladoc as we successfully completed our initial public offering and continued to execute on our growth strategy. We accomplished a lot in 2015 and none of it would have been possible without the hard work and dedication of our Teladoc team. I want to thank everyone for their efforts in making our 1st year in the public markets a success. I'm excited for what 2016 has to bring and I look forward to updating you all throughout the year. With that, I think we'll now open the line for questions. Operator? Your first question is from Sandy Draper from SunTrust. Thanks very much guys. A couple of quick questions. First maybe for Mark. When you look at the growth in the year on the per member per month and then the average visit fee, it's up pretty nicely on a year over year basis. Can you just remind us in terms of that, I know there were some contracts where you were rate you were getting a higher rate per visit fee, etcetera. Did that impact the entire year? How much does that spill into next year? And then what how much more pricing flexibility do you think there is on per member per month as well as visit fees on a longer term basis? Or do you think sort of 2016 is the steady state? Sandy, we've seen a product mix shift throughout quarters, especially as we continue to grow our visit revenues. Our PMPM fees have come up quarter over quarter. We had guided to about a penny increase each quarter. I think Q1 will likely see a very similar per member per month, but throughout 2016, we'll probably see a couple of pennies increase, again, as a result of the higher yielding revenues coming in from our direct sales force and the broker channel. Great. That's helpful. And then the second question, there's been I know there's a little controversy. 1 of the customers that highlighted early on, that was very successful was Home Depot. You obviously won a bunch of new business, but there were a few losses. I know I understand Home Depot has brought on another player. Just curious sort of your thoughts on from going from somebody that was a standout highlighted customer, what caused the transition? How is that going? And just any update on to the extent you can update or willing to update what's going on there, that'd be great. Thanks. Yes, sure. Thanks, Andy. It's Jason. Let me start with the baseline about Home Depot. We originally sold that account through our relationship with Aetna And Home Depot changed carriers for January 1, 2016. As we've discussed in the past, the single biggest reason for us to lose an account is because they change carriers. And so again, Home Depot changed carriers, they moved away from Aetna. Nonetheless, because of the value that we delivered for Home Depot, we retained a portion of that account for 2016. In fact, we retained just over 13,000 members. We've said several times in the past that we're very confident that in a head to head comparison Teladoc would stand head and shoulders above the competition respect to delivering operationally, financially and on all metrics. And we don't believe that any other telehealth company can match our return on investment. That's exactly what's happened with Home Depot. So the account is running at an annualized 40% utilization rate through the 1st 2 months of the year. I'm extremely confident that we're delivering a utilization rate that's at least 5 times greater than our competitor. And when the dust settles, I'm certain that we will have delivered an ROI that's many times greater than our competitor there. Great. Thanks guys. I'll drop back in the queue. Thanks, David. Your next question is from Ryan Daniels from William Blair. Hi. This is Nick Loehr in for Ryan Daniels. Thanks for taking my questions. Could you talk a little bit more about the impact in Q4 and Q1 of the weak flu season? I know it's a transitory issue and you still reported strong visit growth, but did it drive any visit weakness in your view? Yes. The fact that the flu season never really materialized at the end of 2015, led us to decrease our projected visit volume by about 10%. We communicated that in mid January. We are seeing, however, very strong volumes both January February have hit our marks. We did want to come in on the conservative side with a year end number as a result of the fact that we would have still expected a strong March April if the flu makes any material appearance. And so does that have any reverberating effect, if you will, on the business throughout the year, meaning flu might usually be a great way to get used and have people see the value of telehealth early in the year and then they know how to use it again later as sickness arises, does losing that actually hurt momentum at all through the year? As I mentioned in my prepared remarks, we've seen significantly greater yield from our Q4 communications campaign than we've ever seen before, and that's how we were able to actually hit our visit projections and exceed them in spite of the weak flu season. So I would say that if anything, it makes our engagement capabilities even more important and it enables us to stand out even more relative to our competitors. And as Mark mentioned, we did 155,000 visits through the 1st 2 months of the year, which continues on our strong engagement efforts. And again, that's in spite of really having a non existent first couple of months of a flu season. Okay, great. Thank you. Your next question is from George Hill from Deutsche Bank. Hey, good afternoon guys and appreciate you taking the question. I have a few if you'll give me a second. Jason, you talked about the pricing environment seeming pretty steady. I guess, can you talk a little bit about competitive environment just because you had seen so many small private companies come to market and create a lot of noise basically since right before you guys went public. Have you seen it impact your ability? Has there been ability to win customers? Has there been any increased noise to fight through? Or just talk about what you're seeing competitively in conversations with customers? Yes. Actually, I think one of the best ways to illustrate it and we've seen quite frankly the competitive landscape improve over the last few months. What we've seen is that some of our competitors have faltered both operationally and in terms of delivering on their utilization promises. And I think the market is really getting wise to that. So my best example is I was just with one of with our really our top health plan sales rep out seeing a Blue Cross Blue Shield plan. And she was conveying to me that over the last 4 months, she's never been as busy in her whole career as she has over the last 4 months. And she's a career health plan, healthcare IT salesperson. But in this regard, she says that the patina is really wearing thin on some of those low priced or free offers and people are seeing through it to understand what's really there. So if anything, the competitive landscape has really improved over the last few months. And I think George, that's reflected pretty well in the 2016 mid year growth that I described. We've never seen that kind of growth this early in the selling season. And I think it's directly related to our improved competitive position. So when you talk about that mid year growth, am I thinking about it right that you're I call this that you're in the business of fixing bad haircuts where somebody got started with somebody else who isn't performing and you kind of get pulled in mid year as a mid year start to kind of fix an implementation of that. So we should probably so I guess I'll ask you and I'll ask Mark, will we see a different seasonal ramp as it relates to the addition of lives than we've seen historically? So, I think it's a combination of the two things, George. We're seeing good sort of de novo mid year growth where an organization regardless of which segment is adding telehealth for the first time, but we're also seeing competitive wins where we're taking a client from a competitor. And as I mentioned, we've seen that both with a large health plan that happens to be a blue health plan that we're taking away from a competitor as well as with a hospital system, a large academic medical center that we're taking away from a health sorry, from one of our competitors. In fact, the quote from that large health plan is 5 years ago we were ahead of the game, we were ahead of the rest of the market, but we chose the wrong partner and now we're 5 years behind the market. And so we're seeing the benefit of that, but we're also seeing a lot of new growth. I don't know if Mark you want to comment on the mix. Probably further to that answer is over the past several years our mid year growth consisted principally of health plan lives, which had come in, in large boluses over the second half of the year. We already know that we've got commitments. We've turned prospects into clients that will start with us mid year and these are Fortune 5,000 companies. So I think it's a much stronger mix towards employer clients as opposed to our prior reliance on the health plan lives. George, maybe one quick comment I can add to that. We have excellent line of sight into 2,000,000 members of mid year growth and that's about 60% employer lives and about 40% health plan lives. That's great color. And Jason, you kind of the next thing I was going to hit you with, I'll dovetail this so I can hop offline is, I guess if you're looking at your client bucket heat map, which segments of the market are running hottest right now from a demand perspective versus employer sponsors, health plans, TPAs, whatever other buckets there are? And then Mark, profitability for the year looking just a little bit below what I was looking for, but you're trending right away. Any items early in the year that might be outliers that are one outs from an expense perspective that you might call out? And I'll hop off. Thanks guys. Yes. So let me quickly take the heat map question and then Mark will cover the profitability question. I think we're seeing our sales efforts sort of fire on all cylinders. I would say our ASO sales are very strong where we're selling in concert with our health plans into their self insured markets and we're seeing very strong mid year growth there where large companies are adding our benefit off cycle. The health plans, as I said, we have 4 sales for mid year launches in the health plan sector and the broker sales channel is very, very productive, which we're adding resources to that segment. So I don't know, Mark, you want to that probably directly speaks to the profitability question. Yes. George, when we prepared our operating plan to present to the Board in the Q4, we had to prepare that within really maintaining 2 guardrails. And one was to optimize our ability to drive profitable growth. We focus on that basically to ensure that we stay true to our commitment to achieving breakeven in the second half of next year. We presented a budget that increased our investment in the two segments that Jason just referred to. One was in the provider market. We had seen some solid success in that market in the second half of twenty fifteen. So we've decided to increase our investment in the sales, marketing and product development for this segment. The other increase really comes into the broker market where that's been by far the strongest channel for us and it's delivered the most consistent growth throughout the year. We're increasing our investment in the broker teams. It's an area where we have probably the lowest level of competition in the market and the investment dollars there are going to be focused on sales, service and technology investments to really help us optimize our growth throughout 2016. We imagine second half of the year, we'll start seeing the benefits of these investments, will drive additional revenue, clearly setting us up for a very solid 2017, but again maintaining our commitment to achieving breakeven in 2017. That was good. I appreciate the color guys. Thanks. Sure. The next question is from Charles Rhyee from Cowen. Yes. Thanks guys for taking the question here. Can I start with the when I think about the guidance here, and I apologize if I maybe missed it, how should we expect the ramp in membership? You kind of gave a year end membership. Where are we starting here in the Q1? And what would you expect maybe in the midyear starts? Yes. So we had an excellent selling season this year. We're already above the lower end of our Q1 membership guidance, which just to remind you is 14,500,000 to 15,000,000 members. And in fact, we added well over 3,000,000 new members for January 1. When you consider the known attrition that we've discussed previously resulting from the loss of the Highmark fully insured membership and the reduction in the Home Depot account that Sandy asked about. And so in addition to this, as I mentioned, we've got great line of sight into another 2,000,000 members over the rest of this year. So we feel very good about the guidance that we've given of 16,500,000 to 17,500,000 members for the end of this year. Okay. And then when I think about the visit growth here, obviously, you have new clients coming on and you got to ramp them up. Is there a way you can kind of give a sense sort of a pro form a had Highmark not moved and Home Depot changed carriers, maybe sort of what a same store visit growth kind of looked like? Because I think it's kind of like understated a little bit here just because you're having probably more mature clients rolling off and new clients ramping up still? What we've said is that our typical client increases their utilization rate by about 40% to 50% year over year for the 1st 3 years. And so that works its way through as we add new membership. Of course, we're growing our membership at a significant rate. So more than 50% of our membership has been with us less than 24 months. So we'll see what you'll see in our book of business and I think it's fairly consistent and will remain so as we look into the future is that the overall utilization for our entire book of business increases at about a 40% compound annual growth rate. So if you look at the entire book, 2 years ago we were running at 2% utilization and last year we ran it, I guess 3 years ago we ran it 2% utilization and last year we ran it about 5% utilization. Anything you want to add to that? No. I mean to pro form a the figures for the loss of those two named accounts, you would add less than 25,000 visits. To us, that's something that we can clearly make up with our marketing and also a moderate flu season would provide that to us. So it would give you a jump, but it would be a jump of maybe 2%, 2.5%. Okay. That's helpful. And then just one other question, I want to talk about sort of your progress in the provider market. We've talked a lot about the employer and the payer market. Can you talk about how the pipeline on the provider side is looking? Yes, I would say very strong. We've announced 2 specific new hospital systems recently, plus we'll be adding as I said a large academic medical center which will be coming to us from one of our competitors. We're seeing a lot of activity in that space. We have we're the only telehealth company that has a dedicated unit that just focuses on the provider market and a dedicated product offering that's specific to the provider market as opposed to someone trying to retrofit an employer or health plan product to the provider market. And we're seeing that being very, very well received from the providers. So I think you'll see it is a admittedly relatively long sales cycle and the implementation time is longer than the implementation time for an employer, for example. But that ends up being a very sticky client that grows over time as we can add significant additional services into that market. So I feel very good about it. It's why we're increasing our investment in that segment. And as I've said before, 2 years ago nobody was buying in the hospital segment. And today we see not only active RFPs and proposals, but also people writing checks and buying in that segment. Great. Thank you. Your next question is from Lisa Gill from JPMorgan. Thanks. It's actually Mike Majek in for Lisa. In the past, you talked about a significant opportunity to grow your members by expanding within existing plans. Can you talk about what portion of the growth that you're expecting in 2016 is coming from new clients versus the expansion of membership at your existing clients? And sort of where does that overall opportunity stand out today? Hi, Mike. Throughout 20 15, we had generated strong membership additions through our health plan clients. In fact, I think since our IPO, we added about 1,500,000 members from the Aetna channel. We expect to have very similar profile in 2016 with about half of our new business coming from existing clients and existing channels and the other half course, coming from the direct sales and broker market as well as the new revenues that have been generated from our behavioral services. Got it. And then you've also done a couple of small bolt on acquisitions over the past few years. Can you talk about your interest in doing additional deals and whether there's any holes in your offering that you think you need to fill out or potential areas that might look interesting? Yes. So, I would say let me just start by saying I don't think we need to do any acquisitions. Our organic growth has been very strong and all of our projections are based on organic growth. With that said, we're always looking for opportunities to expand our product portfolio and or the markets that we serve, whether it's a new market that we're not currently selling into or one that we're under penetrated. So we have an active business development team that's constantly looking at the market and whether there are opportunities to achieve either one of those goals. Now with that said, we have a very high bar, right, because it has to continue to facilitate the growth rates that we've put up. We're very focused on maintaining our path to profitability. And so finding things that have the strategic fit, the growth rate and the and would not impede our path to profitability is significantly narrows the funnel. So I think you'll see us continue to be active. I can't tell you if and when we'll get any deals done, but they'll have to meet those hurdles. Got it. Thanks for the comments. The next question is from Dave Francis from RBC Capital Markets. Hi, good afternoon guys. Jason, I want to dig in a little bit more on both the payer and the provider channels. You mentioned that you've got some new business that's been signed in both areas. But as you've talked about the evolution of the buying habits of each of those players, it's been historically a little bit more tire kicking and trying to figure out how telemedicine and virtual medicine fits into their business models and what have you. Have you seen a meaningful change in the way that either providers or payers are coming to market relative to your offerings and how they are contracting with you in terms of membership commitments and the like? Sure, Dave. So I'd start by saying the payer market has moved out of the early adopter phase, well into the fast followers. I think the payers partially driven by their self insured clients demanding it from them, but also partially based on their understanding and their recognition now of the real value and impact that this can have on access to care and cost of care are seeing this as a need to have, not just a nice to have. On the provider side, there are really probably 3 things that are working on the providers. 1 is simply a patient acquisition strategy. 2 is a real focus on how they better manage risk as they move toward becoming risk bearing entities and ACOs. And 3 is a focus on provider productivity. So that's an area where people weren't really buying. They were asking a lot of questions and we were having a lot of conversations 2 years ago, but nobody was really buying anything. That has changed pretty significantly. And when I talk to consultants in the market who consult to the health the hospital systems for example, they tell me that telehealth is top of the strategic list of questions. I don't think they've yet figured it out. And so we still get a lot of hospitals coming to us to help them create a strategy in addition to providing them with actual solutions. Does that make sense? Yes, that's helpful color. I guess as a quick follow-up, just circle back to the Home Depot situation around Aetna. What can you guys do to, in certain ways, protect yourselves to a certain degree from similar type of situations where you perhaps make a meaningful investment in an evangelism process with a membership group only to see that some sort of transient wave move because through no fault of your own, but the decision to switch carriers. Is there a way to carve out what you guys are doing with certain employers that you're working with through some of your payer partners? Or what other things might you be able to do to protect yourself there? Thanks. Yes, sure. So that you have it exactly right. So the first thing is obviously for us to continue to focus on driving meaningfully higher utilization than anyone else in the market. 2nd is to really highlight that for our clients and make sure that they clearly understand the return on investment that they're getting. And third is to make sure that we develop deep enough relationships with those accounts regardless of what channel they come through such that by the time they if and when they end up leaving their carrier, they stay with us. And we have a concerted and very focused effort on making sure that those three things happen. We never like to lose an account or even a part of an account regardless of what the reason is. And so we're very focused on putting those three things in place such that we can sort of build a moat around our accounts regardless of what their carrier decision is. Okay. That's helpful. Thank you. The next question is from Steve Halper from FBR. Yes. With respect to the extra investments that you're making for 2016, as you outlined, how quickly do those ramp down in order to be able to allow you to get to that breakeven mark that you advertised for 2017, I. E, do those are those investments just simply go away in 2017? No, Steve, they're going to normalize through 2017, but we end up seeing the leverage through the additional revenue that's coming on in 2017. In fact, you look at our 4th quarter run rate expenses, they're only going to grow 10% throughout 2016, while we've got top line growth that's coming clearly closer to an excess of 50%. So we'll see that continue throughout 2017 and we'll see the leverage coming in from materially smaller increases in cost and the contribution from that increased revenue is what really drives us from the EBITDA loss position to breakeven in 2017. Got it. Thank you. The next question is from Stephen Wardell from Leerink Partners. Hi, guys. It's actually Matt DiWello in for Steve. Couple of quick ones. You mentioned longer term achieving the 60, 40 mix in subscription versus visit fees. Can you remind us how we should think about gross margins as you move towards that mix? Yes, sure. We had shared with everybody that we believe we're still going to hold at the 70 percent margin between low 70s to 70% margin for 2016. As we continue to see a ramp up of our visits, we believe over the next 2 to 3 years, our margin profile is going to become closer to 65% 60% to 65%. That's a today, the contribution of visits generating based on the visit, whether it's behavioral or general medical and dermatological. We have visit margin profiles between 35% 50%. And obviously, our subscription fees are generating margins about 2 times as high. So when we start seeing the product mix blend to that sixty-forty, we get a more normalized profile that's in the 60% to 65% range. Okay, great. That's helpful. And then if you could talk a little bit more about behavioral health traction, and where are you seeing that traction? When did you officially launch that capability? And what might it contribute to fiscal 2016? Yes. So let me talk about the market traction. I'll let Mark go through the financials. When we think about behavioral health, we think about it in 2 segments. 1 is our direct to consumer segment, which we really launched the beginning of 2015. And the second one is our B2B offering, which we launched for really first availability, January 1, 2016. So, on the direct to consumer side, we're seeing great performance, very strong growth, really good adoption and persistency among the membership base. And so we continue to be excited about that segment. With respect to our B2B offering, we're implementing new accounts over the course of the first and second quarters. And of course, we'll continue to do that over the course of the year. So I would say, don't look for meaningful contribution in 2016 from the B2B segment. Really we're building growth, adoption and penetration over the course of this year and we'll see significant contribution in 2017. And I think I'll add that all of that is consistent with the DTC product except for the fact that you should expect explosive growth. While we're still penetrating a very nascent market, the fact is that in Q1 of 2016, we'll easily double the revenue we had, perhaps triple the revenue we had in our direct to consumer business. We ended the year with about $5,000,000 in revenues. We'll easily exceed 10,000,000 dollars We've got great line of sight and the attraction of the product is just gaining momentum. So we're obviously hoping that we get to see that same thing develop on the commercial product. The next question is from Charles Rhyee from Cowen. Thanks. Just for the follow-up here. Jason, I just wanted to ask a more broader question here. We're talking about utilization now in the 5%, we're probably going to 6% or so as we get out in the next couple of years. As the market overall, because obviously if we add up all the players, we're still a very small fraction of total outpatient visits. Do you still anticipate or do you anticipate we get to a point where people more generally see the value in this and could we get a more of a hockey stick inflection in terms of utilization? If so, what do you think needs to happen to get there? If not, what might be the impediments to that? Thanks. Yes, absolutely. So let me start by saying, it's a little bit dangerous to do a or misleading, I guess, to do an overall utilization over the full book of business because the book of business as a whole is very heterogeneous, right? So you have certain populations where we have 50%, 60%, 70%. I see a report every morning on our clients' utilization patterns. They have a 2,000 employee account that's operating at almost 100 percent annualized utilization. So we have segments of the business that operate at significantly higher utilization rates. And others like as we've talked about in the past, we have large managed Medicaid populations where the client has decided legacy client who's decided years years ago to put us behind a nurse line that sees very, very small utilization rates. So I think that when you look across the entire population, it's artificially low. So with that said, I think as we continue I don't write the kind of relationships that we did back in 2010 2011 where we didn't have so much choice. Now we know a lot better and quite frankly we'll say no to a client if we don't think that they're launching in a way that's going to drive meaningful utilization and strong return on investment. So I think you'll see, our utilization rate continue to increase over time as more and more companies, whether it's an employer or a health plan or otherwise, adopt and integrate telehealth as a more core part of their benefit, communicate it more, promote the utilization through financial incentives. And so I think you'll continue to see that occur. I had a great conversation with a practice leader and thought leader at 1 of the consulting firms yesterday who really understands the massive difference between a company who doesn't subsidize the telehealth visit and somebody who does and demonstrates for the client the reason that they should make it a 0 copay for the employer. 2 or 3 years ago that would be unheard of for a consultant to make that argument to the employer. Today it's happening routinely. So I think those things are going to continue to occur. And because of the data set that we have now having done probably 1,300,000 visits in our history, we are able to much better educate our clients on what they can do to maximize their utilization. So you think it's an issue of benefit design changes have to kind of come around to really incent sort of to kind of tip the scales to really accelerate. I mean, not that we're not having great growth now, but when we think about the total utilization of telemedicine, telehealth services to its potential, you think it's more of a benefit design issue? It's benefit design, communication and executive sponsorship, right? If we get those three things and then we add in the expanding product portfolio that we bring to bear, so that we're engaging the consumer more and being a one stop shop for any of their clinical issues and not just a single set of clinical issues, that really will those will all be sort of a virtuous cycle that creates a snowball effect and massively increases utilization. Great. Thanks a lot guys. Absolutely. Thanks Charles. There are no further questions at this time. I will turn the call back over to the presenters. So I'm just going to close with a thank you for everybody for being with us and participating in our 1st year. We close out our 1st year as a public company. I'm very, very pleased with our performance. I'm pleased that we've been able to raise our guidance and I'm pleased with the performance of the company. And I just want to reiterate what I said earlier about, thank you to the entire Teladoc team and our clients for joining us on this journey. With that, I'll close the call. This concludes today's conference call. You may now disconnect.